Treaty definition of dividends prevails over domestic deeming fiction, so a loan or advance was not taxable as deemed dividend.

Section 90(2) gives treaty protection priority where the India-Canada tax treaty is more beneficial to the taxpayer. Under Article 10, dividends are limited to income from shares or similar profit-participating rights and income assimilated to share income under the source-state law. A loan or advance, even if treated as deemed dividend under domestic law, does not fall within that treaty definition. Accordingly, treaty protection prevails over the wider domestic deeming fiction, and the advance could not be taxed as deemed dividend; the addition was unsustainable.

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Issues: Whether the amount received by the assessee from the Indian company could be taxed as deemed dividend under domestic law despite the assessee being a resident of Canada and the India-Canada Double Taxation Avoidance Agreement.

Analysis: Section 90(2) of the Income-tax Act, 1961 gives effect to the treaty to the extent it is more beneficial to the assessee. The relevant treaty definition of dividends under Article 10 covers income from shares or other rights participating in profits and income assimilated to share income under the taxation law of the source state. A loan or advance, even if treated as deemed dividend under the domestic provision, does not fall within that definition. Therefore, where the assessee is entitled to treaty protection, the treaty definition prevails over the wider domestic deeming fiction.

Conclusion: The amount received as advance could not be taxed as deemed dividend under Article 10 of the treaty, and the addition was unsustainable.

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